Did you take these deductions on your tax return?
By Salim Omar, CPA

Almost nothing is quite so satisfying as an income tax refund. There’s no question that saving money in taxes is high on everybody’s list of financial priorities, especially owners of professional practices.

Taxes are an inevitable — and painful — part of every professional practice owner’s life. But there are ways to reduce, if not eliminate, your practice’s tax burden if you know how to use business-expense tax deductions to your advantage.

Most practice owners know they owe taxes only on their net business profit — that is, total profits after they subtract deductions. But knowing how to take full advantage of your deductible business expenses to lower your taxable profits dramatically often times requires special knowledge and help from a professional.

Here are the four most overlooked tax deductions:

1. Full home-office write-off. The tax rules allowing a taxpayer to claim the home office deduction were loosened, beginning January 1, 1999. Your home office does not need to be your “principal place of business.”

The home-office test can now be satisfied if you use your home office for “administration or management activities” and you have no other fixed location in which you perform such activities for your business. The home office still must be used exclusively for business purposes to qualify. This allows more taxpayers, including chiropractors who conduct business outside of their office, but use their home to perform administrative tasks, to qualify for the home office deduction.

2. Family medical expenses. This strategy is a little more complicated but is well worth the extra effort. To use the strategy of writing off family medical expenses, first you must hire a spouse or other trusted family member to work for your chiropractic practice; either full-time or part-time status will work. (Note: They must actually perform work; they cannot be ghost employees.)

Next, you need to set up and sign a health savings account (HSA) and/or a health reimbursement arrange-ment (HRA). You may need the advice of an accountant to help you with this. These types of arrangements allow a sole proprietor to convert all family out-of-pocket medical expenses into legitimate business deductions.

Finally, your spouse or family member pays all out-of-pocket medical expenses for the family, keeping receipts, and documenting miles driven for medical purposes. At a specified time, your chiropractic practice reimburses your spouse or family member for these expenses and deducts them as a business expense.

3. Your child’s college education expenses. If you frown at the high cost of a college education, this tax strategy is for you. Put your child on the payroll of your chiropractic practice for performing office chores and other business-related task, and then invest the money earned into a college-education fund.

The most common way to utilize young children in your professional practice is for them to provide cleaning services or routine copying, filing, and typing. These are jobs that even a child is clearly capable of performing, and that you’d arguably have to pay someone to do if your child were not available.

In 2006, a child can earn up to $5,150 and pay no federal income taxes on the earnings because of the standard deduction. Your business can deduct wages paid to your child, provided the amount is reasonable and for bona fide work.

Bottom line: You’ll escape federal income taxes of up to $5,150 of your business income, and if you are in a sole proprietorship, you will eliminate self-employment tax on the income as well.

Any income your child earns over and above the $5,150 standard deduction is taxable at your child’s rate. Since the 10 percent tax bracket extends to $7,300 for a single filer, your child could earn an additional $7,300 and owe just $730 of federal income tax. Because your marginal tax rate is likely much higher, the extra money your child earns may result in family tax savings.

Even better, if your professional chiropractic practice is not incorporated, you won’t have to withhold or pay FICA (Social Security and Medicare) payroll taxes on the earnings of a child under age 18.

4. Make your kids eligible for a Roth IRA. This is an incredible tax saving often underutilized by chiropractors. This tax strategy is related to the strategy outlined above, but takes it a step further. Hire your children, pay them at least $4,000, and put the proceeds into a tax-free Roth IRA.

The U.S. Tax Court has validated a parent hiring his 7-year-old son to work for his business and allowed the deduction for reasonable wages paid. So if your child takes the yearly $4,000, from age 7 to 18, and invests it under the Roth IRA umbrella at 8 percent per year, compounded monthly, that child will have accumulated about $67,000 by age 18.

If you leave all the money untouched, but contribute nothing after your child hits 18, by the time the child is 60, he or she will have accumulated more then $1.9 million that can be withdrawn tax-free.

Salim Omar, a tax and financial educator in Monmouth County, New Jersey, and author of Straight Talk About Small Business Success in New Jersey, specializes in working with small business owners and professional practice owners. He can be reached by e-mail at Salim@OmarGroupCPA.com or through his Web site, www.OmarGroupCPA.com.